Wednesday, February 25, 2015

On February 15th,
John Oliver’s HBO show “Last Week Tonight” featured a segment that tackled the tobacco
industry.
In the segment, Oliver showed disgust that tobacco companies have become more
profitable over time despite decreasing rates of tobacco consumption.

There is an easy
explanation for this. Tobacco products are heavily regulated and taxed in most
states throughout the US. The costs of these regulations and taxes push
smaller tobacco companies who cannot afford them out of the market. This leaves
larger market shares and profit shares for the bigger companies who can afford
to cover the costs of these regulations. So while John Oliver is supporting
heavy regulations because he thinks they are reducing the profits of these big
tobacco companies, in reality, these companies are benefitting from them.

Oliver pointed
to the Australian tobacco market and praised its government for its plain
packaging mandate, which eliminates branding and requires all similar tobacco
products to look the same. Oliver suggested that the United States adopt a
similar policy because tobacco companies are too profitable and he claims such
a policy would help lower tobacco consumption. Not only is a plain packaging
mandate a massive violation of intellectual property rights because it strips
companies of their trademarks and branding, but there is also no evidence that
the Australian plain packaging regulations have caused lower levels of tobacco consumption.

Ernst &
Young LLP also released a paper entitled “Historical Trends in
Australian Tobacco Consumption: A Case Study” which found “no evidence that
plain packaging in Australia has reduced total consumption to date.” But plain
packaging has had an effect on the tobacco market. Since Australia’s mandate
went into effect, consumption of black market tobacco products has increased by
roughly 55 percent. Because the
supply of black market tobacco products has increased, the access to children
has also increased, resulting in a 30 percent hike in daily smoking rates of
12-17 year olds, according to the International Property Rights
Index. I
doubt these are the results John Oliver is trying to promote.

Granted, these
are results from Australia, but the results should not go unnoticed. We already
know that tobacco tax rates are so high in some states in the US that
individuals are selling “loose cigarettes” despite the aggressive enforcement
from police. Removing trademarks and branding, which tobacco users place a high
value on, would violate the intellectual property rights of tobacco companies
and certainly would push tobacco consumption into a black market.

Tuesday, February 24, 2015

This Thursday, February 26, will be a fateful day for the
future of the Internet. As I wrote recently in a Washington Times op-ed, “The
FCC’s Coming Internet Regulations,” “in the nearly 40 years that I have
been involved in communications law and policy, including serving as FCC
Associate General Counsel, this action, without doubt, is one of the agency’s
most misguided.”

As the vote approaches, I don’t have any second thoughts
regarding that statement. Reduced to its essence, the way I put it at the
beginning of the Washington Times
piece gets to the nub of the matter: “Regulating
Internet providers as public utilities in order to enforce net neutrality
mandates will discourage private sector investment and innovation – and lead to
even more special interest pleading at the FCC for favored treatment, and
heightened litigation for years to come.”

For those interested
in learning more about the forthcoming decision of the FCC’s Democrat majority
to regulate Internet providers, even wireless companies, there are literally
dozens, if not hundreds, of publications on the Free State Foundation’s website and its blog. And in a moment,
I want to call your attention especially to three pieces published just within
the past two weeks that are worthy of your attention.

But first this: The initial
essay I published this year, on January 2, was titled, “A Question for 2015: Is the FCC Unlawful?” The piece bears revisiting as the FCC is
poised to expand its control over the Internet in ways that threaten its future
without any present justification – that is, without a justification that is
not trumped up. The reality is that there is no evidence of present market
failure and consumer harm that justifies the Commission asserting more control
over the Internet – regardless of which theory of law the Commission relies
upon.

But here’s an
important point I wish to make regarding the FCC “lawfulness” in advance of
Thursday’s vote. As Philip Hamburger discusses in his new book, “Is Administrative Law Unlawful?”, one of the objectives of our Founders was to
control, if not eliminate, what in England was known as the “dispensing” power.
Simply put, the “dispensing” power – and this power is much discussed in
English constitutional history – was a form of exercise of royal prerogative
under which the King could avoid, or dispense with, complying with particular
laws, including those enacted by Parliament. As Professor Hamburger discusses
at some length, today’s administrative agencies, in essence, have resurrected
the “dispensing” power by the way they often use waivers to award favored
treatment.

Here is the way
Professor Hamburger puts it:

“After
administrators adopt a burdensome rule, they sometimes write letters to favored
persons telling them that, notwithstanding the rule, they need not comply. In
other words, the return of extralegal legislation has been accompanied by the
return of the dispensing power, this time under the rubric of ‘waivers.’”

And then he goes to
the heart of the matter:

“Like dispensations,
waivers go far beyond the usual administrative usurpation of legislative or judicial
power, for they do not involve lawmaking or adjudication, let alone executive
force. On the contrary, they are a fourth power – one carefully not recognized
by the Constitution.”

Now, I understand
that seeking and receiving “waivers” of the FCC’s rules (regardless of the
precise name applied to such dispensations) is an established part of FCC
practice. And in some instances, such waivers, in light of unique circumstances
or hardships, are no doubt justified. But I am convinced that under the new set
of Internet regulations about to be adopted by the Commission, we are likely to
witness the exercise of the agency’s “dispensing” power – this power which the
Founders wished to eliminate – in ways, and to such an extent, that rule of law
norms at the FCC will be called into further question.

This is what I meant
when I said above that the new regulations are likely to raise pleading for
special treatment and favors to new heights at the FCC. As the agency gains
even more control over various participants in the Internet and communications
marketplace, it will be subject to increasing pressures to use its dispensing
power to grant this or that company (or market segment) favored treatment. For
example, despite FCC protestations to the contrary, which protestations, by the
way, do violence to the ordinary usage of the English language, the FCC will
regulate the rates of some firms but not others, by holding unlawful the usage
plans, sponsored data, or zero-rating plans, of some firms and not others. Or,
to be sure, under its new inherently vague “good conduct” rule, the agency will
be granting dispensations to some firms and not others, based on the exercise
of discretion untethered to any standard in any law duly enacted by Congress.

This is part of what
I mean by asking the question: “Is the FCC Unlawful?”

Now, for further
readings in advance of the FCC’s February 26 vote (if you haven’t had a chance
to read them already, I commend to you these excellent Perspectives from FSF Scholars published in the past two weeks:

Each of them alone makes a convincing case that the course upon which the
agency is about to embark – imposing Title II public utility regulation on
Internet providers – will be harmful to consumers and to the future development
of the Internet by thwarting investment, innovation, and consumer choice. Taken
together, the case is devastating.

Now the act of imposing public utility regulation on Internet providers
that I decried this past September in “Thinking the Unthinkable” is about to become reality. In the aftermath
of the significant extension of government control over the Internet that,
absent intervention by the courts or Congress, will ensue, I am convinced the
question I posed at the beginning of the year – “Is the FCC Unlawful?” – will be asked with increasing frequency
and seriousness of purpose.

Thursday, February 19, 2015

The common
perception among Title II opponents is that reclassification of broadband as a
telecommunications service would levy a massive amount of new taxes and fees on
Internet users. Robert Litan and Hal Singer of the Progressive Policy Institute
estimated in a December 2014 policy brief
that Title II regulations will add about $11 billion in new taxes.

Free Press claims that the
extension of the Internet Tax Freedom Act (ITFA) by Congress eliminates the
possibility of Title II reclassification resulting in any new taxes or fees. Now that FCC Chairman Tom Wheeler released a
synopsis of his proposal (he has not released full proposal to the public), it
is important that we get a straight answer.

Although
Chairman Wheeler did not mention anything about new taxes or fees in his Wired blog poston his proposal on February 4th, the FCC Fact Sheet on the proposal
clearly states:

The Order will not impose, suggest or authorize any
new taxes or fees – there will be no automatic Universal Service fees applied
and the congressional moratorium on Internet taxation applies to broadband.

So it is clear? Chairman
Wheeler’s proposal to reclassify broadband under Title II will not add any new
taxes or fees, right? Wrong!

FCC Commissioner Ajit Pai released a February 6th statement on the 332 page
proposal stating:

The plan explicitly opens the door to billions of
dollars in new taxes on broadband. Indeed, states have already begun
discussions on how they will spend the extra money. These new taxes will mean
higher prices for consumers and more hidden fees that they have to pay.

Okay, so which
statement is true?

Mr. Litan and Mr.
Singer clarified the results of their paper in a blog post after Free
Press claimed the findings were inaccurate due to the extension of the ITFA.
Despite the passing of ITFA which generally bans Internet sales and access
taxes, the Litan and Singer policy brief takes into account state-based telecom
related fees for which there is no federal preemption.

Additionally,
Hal Singer wrote a Forbes article after Chairman
Wheeler released his blog. He said that even if the proposal does not include
any new federal taxes, “state and local fees that apply to the ‘obligations of
a telecommunications carrier’ could easily be extended to Internet service
after reclassification.” Mr. Litan and Mr. Singer estimated in their policy
brief that Title II regulations will cause annual state and local fees levied
on wireline and wireless broadband subscribers to increase by $67 and $72,
respectively.

Here is what
seems to be going on. Chairman Wheeler is promising forbearance from the
imposition of new taxes and fees, but he has no control over the actions of state
and local governments which levy taxes on telecommunications providers. Additionally,
the forbearance process likely will take months to years to complete and Chairman
Wheeler has no authority to overrule the decisions of current or future commissioners.
In other words, the proposal promises no new taxes, not because Title II regulations
do not levy them, but because Chairman Wheeler hopes that future commissioners
will vote to take federal taxes off the table and that state and local governments
will not levy existing tax laws on Internet service providers. At least, this
is the political agenda Chairman Wheeler is promoting at the moment.

When it comes to
the forbearance of new taxes and fees under Title II, we should expect the
worst and hope for the best. Unfortunately, the uncertainty of the forbearance
process is enough to ensure that not all taxes and fees, if any, will be
eliminated from Title II regulations.

Tuesday, February 17, 2015

One of the basic purposes of government is to protect private
property rights. Article I, Section 8 of the U.S. Constitution recognizes
copyright as property right and empowers Congress to secure royalties for
copyright holders. But when it comes to copyright in sound recordings and music
performances, current federal policy contains critical flaws. Reforms are
needed to provide more adequate and equal protection for those rights.

Congress should take the Copyright Office report’s
principles and recommendations seriously. It should act to ensure public
performance rights apply equally to all technology platforms, including terrestrial
broadcast radio. Similarly, Congress should adopt a uniform, market-based rate
standard for royalties that is applicable to all platforms. And it is
noteworthy that the Copyright Office Report acknowledges that, in one way or
the other, public performances of sound recordings made prior to 1972 should be
subject to compensation so that the property rights of artists and creators of
the pre-1972 recordings are secured.

As a general matter, current federal copyright law
recognizes that public “performances” of musical sound recordings by commercial
music service providers entitle the holder of a song’s copyright to royalty
payments. But when the copyright’s holder and providers of music services
cannot agree on royalties, federal law imposes a compulsory licensing and rate
requirement. For most music services, the Copyright Royalty Board conducts
ratemaking proceedings to establish sound recording copyright holder royalties.
Copyright Judges set rates for traditional media like CDs and vinyl and for Internet-based
digital music services. They also set rates for satellite providers,
non-commercial broadcasting, and certain cable providers.

According to the Register of Copyrights, “[t]here is a widespread perception that our licensing
system is broken.” This month, the
Copyrights Office released its lengthy report, titled “Copyright and the Music Marketplace.” The report lays
down several guiding principles for reform of federal copyright policy
regarding sound recordings and music public performances. Among them:

Government licensing processes should aspire to treat like uses of music alike.

Government supervision should enable voluntary transactions while still supporting collective solutions.

A single, market‐oriented ratesetting standard should apply to all music uses under statutory licenses.

Based on those and other principles, the report offers a
series of preliminary recommendations for copyright policy change. Three report
recommendations for advancing parity in licensing deserve particularly close
attention from Congress.

First, Congress should: “Extend
the public performance right in sound recordings to terrestrial radio
broadcasts.” Existing law allows
broadcasts of copyrighted music content without any need for copyright holders’
mutual agreement. But it is only equitable that terrestrial or over-the-air
broadcast radio should have to respect performance rights of copyright holders.
Current policy unfairly gives terrestrial broadcast radio a privileged position
vis-à-vis commercial music services that use different transmission
technologies and business models. This puts satellite and at a competitive
disadvantage. A 2013
Green Paper by the Department of Commerce made these
same points. It is now time for Congress to act.

Second, Congress should: “Adopt a uniform market‐based ratesetting standard for all government
rates.” The current federal policy of applying varying rate
standards dependent on the underlying service technology is nonsensical and
should be discarded. And in achieving uniformity in rate standards, Congress
should prefer a standard that at least seeks to approximate free market
outcomes rather than perform protectionist functions.

That is, Congress should
only apply a “willing buyer/willing seller” standard for “reasonable” rates,
definable as payments that “most clearly represent the rates and terms that would
have been negotiated in the marketplace between a willing buyer and a willing
seller.” This standard currently applies to non-interactive Internet-based
digital music services such as Pandora, Spotify, and iHeartRadio – but not to cable and satellite video service
providers. Congress should jettison the so-called 801(b) rate standard, which
among things is calculated to “minimize
any disruptive impact on the structure of the industries involved and on
generally prevailing industry practices.” As I have written previously, Section 801(b)’s
“anti-disruption proviso epitomizes what is wrong with the existing regulatory
regime controlling music copyright royalties.”

The report considers full federalization of the pre-1972
recordings – that is, federal field preemption of state law – one approach to
achieving the desired result of ensuring compensation for performance of such
recordings. Another possible approach is embodied in the
RESPECT ACT. This previously introduced legislation does not preempt the field of state law
protection in pre-1972 sound recordings as such. Instead, it provides that
digital music services providers – such as Internet radio, cable, or satellite
– must pay royalties for public performances of pre-1972 sound recordings in
the same manner as they now do for post-1972 sound recordings. The RESPECT ACT
would make such payment a safe harbor from state copyright infringement claims.

It may be that the federalization approach would be an
acceptable means of achieving proper compensation for use of the pre-1972
recordings. And if so, there may be other changes in the Copyright Act – such
as improving the efficacy of the DMCA procedures – that should accompany such
federalization. In any event, it is important that the property rights in
pre-1972 sound recordings be secured.

The Copyright Office report contains many other reform
proposals worth considering. But the report recommendations for advancing
parity in licensing should be critical components of any congressional efforts to
reform copyright policy for sound recordings and music performances. Congress
should act to make copyright policy more amenable to free market transactions
and to equitable treatment of music copyright holders and music service
providers alike.

The Trustworthy
Accountability Group (TAG) recently
launched
what it is calling the Brand Integrity
Program Against Piracy. The program will coordinate with companies in
need of advertising and reliable advertising agencies in an attempt to diminish
the number of advertisements that appear on websites which facilitate access to
illegal content or counterfeit goods.

The Brand
Integrity Program Against Piracy was supported at its launch by the U.S. Chamber
of Commerce and a several organizations and companies involved in advertising,
online publishing, advertising technology, media, and consumer protection,
including:

Any advertising
agency that wants to participate in TAG’s new initiative can do so by using
validated tools and services to identify and prevent advertising from running
on websites which violate core IP principles.

TAG will also
work with third party validators, such as Ernst & Young and Stroz
Friedberg, to certify ad agencies as “Digital Advertising Assurance Providers”
(DAAPs). In order to be certified as a DAAP, advertising agencies must be able
to identify ad risk entities, prevent advertisements on undesired ad risk
entities, detect, prevent or disrupt fraudulent or deceptive transactions, and
eliminate payments to undesired ad risk entities. Once an ad agency is
certified as a DAAP, it can work with companies to ensure that their ads do not
end up on websites with illegal content.

This is a very
important initiative considering there has been a rise in the number of
ad-supported piracy websites. The Digital Citizens Alliance released a February
2014 report entitled “Good Money Gone
Bad,”
concluding that websites selling advertising against illegal content make
roughly $227 million in annual ad revenue. The largest Bit Torrent websites are
making more than $6 million a year, but even some of the smallest websites make
more than $100 thousand a year.

While it is hard
to estimate how much of this ad revenue is lost to the original artists and
brand owners, even a $1 loss to innovators and entrepreneurs due to theft of IP
is very unfortunate. This initiative and other private tools, such as WheretoWatch.comandRightscorp, are a step in
the right direction towards diminishing the size and scope of online piracy and
the sale counterfeit goods and content.

Strong IP rights
are important for ensuring that content providers, artists, innovators, and
marketers can earn a return on their ideas and labor, incentivizing more
innovation, investment, and economic growth.

Thursday, February 12, 2015

The midseason
premiere of AMC’s hit show “The Walking Dead” set a new record for the series
in terms of illegal downloads. Variety
reported that within 20 hours of the February 8th premiere
approximately 1.29 million Internet addresses had pirated the episode. Although
HBO’s “Game of Thrones” season four premiere has the record with 1.86 million
pirated copies within 24 hours of the debut, “The Walking Dead” seems to be the
second most pirated show.

It
is unfortunate that these pirate parties continue to occur and in record-setting
fashion. (See here
and here.)
Innovative tools, such asWheretoWatch.comandRightscorp,
have emerged in order to diminish piracy and protect intellectual property
rights. But as long as these unfortunate events continue to occur, new efforts
should be made to severely diminish the size and scope of theft of intellectual
property. The protection of intellectual property rights is essential for
encouraging more innovation, creative content, and economic growth, because it gives
individuals the ability and incentives to provide valuable goods and services
for consumers.

Tuesday, February 10, 2015

On February 4th,
the Global IP Center at the US Chamber of Commerce released its 3rd
edition of the International IP Index. The Index scores 30 countries,
representing 80 percent of the world’s gross domestic product, between 0 and 1
for 30 indicators across six separate categories. The six categories are:

Patents, Related Rights, and Limitations

Copyrights, Related Rights, and
Limitations

Trademarks, Related Rights, and
Limitations

Trade Secrets and Market Access

Enforcement

Membership and Ratification of
International Treaties

The United
States scored the highest with a 28.53 (out of 30) followed by the United
Kingdom and Germany with scores of 27.61 and 27.28, respectively. The countries
with the lowest scores were Vietnam, India, and Thailand at 7.84, 7.23, and
7.1, respectively.

The index also
found some interesting correlations concerning strong IP rights across all
countries:

Strong IP rights and research and development
(R&D) expenditure:
Companies in economies with advanced IP systems are 40% more likely to invest
in R&D.

Strong IP rights and foreign direct investment (FDI): Strong IP
protections in the life sciences sector account for 40% of life sciences
investment. Additionally, economies with beneficial IP protection see 9–10
times more life sciences investment than economies with weak IP protections.

The United
States is certainly a world leader with respect to IP rights and enforcement. But
while the United States is at the top of the index, it would be better off if
all countries caught up to its leadership in IP. In fact, the entire global
economy is better off when developing countries adopt stronger IP policies,
because strong institutions, such as IP, have a positive externality on the
global economy. When one country adopts stronger IP rights, it makes its
surrounding countries and trading partners better off, because it encourages
more innovation and more economic activity. Even if one country has weak IP
rights protections, it can import goods from a country with strong IP rights,
which will hopefully lead to better policies as the benefits from strong IP
rights are realized. Thus, the gains from global trade are much higher in a
world with robust IP rights.

The Ambassador
of the Republic of Singapore to the US, H.E. Ashok Kumar Mirpuri, stated during
the ceremony at which the index was released that policymakers should use the
index as a guide for how their country can improve. The index provides sound
analysis for areas in which specific countries can gain ground in coming years,
and it shows as 20 of the 30 countries improved their score over the past year.

The data shows
that strong IP protections incentivize investment in R&D, innovation, and
creative content, because entrepreneurs can earn a return on their labor and
ideas. In turn, this means that economies can grow and prosper if individuals
have the ability and incentives to provide valuable goods and services for
consumers.

Monday, February 09, 2015

There are a lot of very good pieces in the blogosphere and elsewhere -- including our own! -- explaining why the FCC should not adopt Title II regulation for Internet providers.But for some time now I have been meaning to commend to you one of the really good ones, a satiric essay by the Institute for Policy Innovation's Tom Giovanetti that ran in the National Review Online. I guarantee that you'll smile -- or laugh out loud -- while you're ready it. But it will be a knowing smile or knowing laugh.Knowing as in knowing that the government shouldn't convert the Internet into a public utility.Nice work, Tom!

The
Federal Communications Commission has a paramount duty to protect consumers. In
fulfilling that duty it must not squander Universal Service Fund “surcharges”
imposed on consumers’ telephone bills that have the same economic effect as taxes.
Like tax dollars, consumer surcharges must be used efficiently and not put at
unnecessary risk.

But the
FCC is considering whether to waive important financial safeguards of its rural
broadband experiments program. Seven rural electrical co-operatives hand-picked
by the FCC to become broadband service providers with the aid of federal subsidies
want letters of credit rules watered down. Those subsidies are funded by de facto taxes on voice consumers. Just
last year, the FCC deemed establishment of strong safeguards to protect against
misuse of funds its “paramount objective.” The FCC should hold fast to that
objective by maintaining strong letters of credit requirements.

The Rural
Broadband Experiments program is one aspect of the Connect America Fund’s Phase
II plan for bringing universal service into the broadband era. All universal
service programs are ultimately funded by voice consumers. The 16.8% line-item
surcharge
on the long-distance portion of consumers’ monthly bills effectively operates
like a tax. The FCC sets the surcharge rate and oversees use of the surcharges collected.

Through
its Rural Broadband Experiments program the FCC is slated to give nearly $40
million dollars drawn from voice consumers to rural electrical co-operatives.
The money is to fund the co-ops’ entry into the broadband business.

Yet, as I
explained in a prior blog post, the “FCC Should Not Use
Scarce Universal Service Funds to Subsidize Unproven Start-Ups.” (Also see FSF
President Randolph J. May’s follow-up blog.) That post drew upon a
basic principle: it is not
government’s job to create new businesses using consumers’ hard-earned dollars.
Granting special favors to would-be business entrants distorts the role of
government as a neutral enforcer of the law. Giving favored interests start-up
money to move into new lines of business similarly undermines government
impartiality.

In the
time since my November blog post, the FCC decided to fund new co-op ventures in
broadband. Now what’s done may be done. But another basic principle which that
blog drew upon still holds: government must protect consumers by carefully
using scarce funds. The FCC must steadfastly adhere to this principle in
implementing its Rural Broadband Experiments program.

Right now the FCC is weighing whether it
will significantly weaken financial safeguards for funds to be doled out for
rural broadband experiments. An alliance of rural electrical co-ops is seeking
a waiver from rules requiring letters of credit (LOCs) that were established by
the FCC in its Rural Broadband Experiments Order (2014).

The Order
sensibly required that recipients of funds for rural broadband experiments
obtain letters of credit from banks. LOCs are intended to ensure that the full
amount of disbursed funds will be returned to the FCC should the recipients
fail to use those funds as pledged or otherwise fail to meet build-out and
service obligations.

The FCC’s Order emphasized the financial responsibility and security reasons
for its rules:

LOCs are an effective means of securing
our financial commitment to provide Connect America support. LOCs permit the
Commission to protect the integrity of universal service funds that have been
disbursed and immediately reclaim support that has been provided in the event
that the recipient is not using those funds in accordance with the Commission’s
rules and requirements to further the objectives of universal service.
Moreover, LOCs have the added advantage of minimizing the possibility that the
support becomes property of a recipient’s bankruptcy estate for an extended
period of time, thereby preventing the funds from being used promptly to
accomplish our goals. These concerns are relevant to both new entrants and
established providers.

Further:

Our paramount objective is to establish
strong safeguards to protect against misuse of the Connect America Fund. We
conclude that requiring all entities to obtain a LOC is a necessary measure to
ensure that we can recover support from any recipient that cannot meet the
build-out obligations and public service obligations of the rural broadband
experiments.

The FCC is
now taking public comments on the waiver petition filed by the rural
electrical co-ops. In their petition, the co-ops contend that banks are
unwilling to extend them LOCs on terms required by the FCC. They also claim the
FCC’s rules are too financially burdensome.

But the
need to protect limited funds from risk should keep the FCC from cutting
corners on financial safeguards. The FCC should keep its focus on its paramount
objective of safeguarding scarce USF funds against misuse. That certainly means
being mindful of the reasons for LOC requirements set out in the Rural Broadband Experiments Order.

Without
fixating on specific dollar figures or timeframes that should govern LOC
requirements, a few more considerations weigh against rolling back safeguards. First,
keep in mind that the FCC is funding experiments. Typically, market investors
and entrepreneurs bear the risk of financial mishaps and failures. Here,
however, funds collected from consumers are devoted to entrants lacking
business and technical experience in providing retail broadband Internet
services. Rural electrical co-ops are rate-of-return monopoly service providers
that have historically operated in a market environment and line of business
quite different from broadband. The highly experimental nature of subsidizing
co-op entry into broadband services requires protections against the heightened
risk that carries.

Second,
prior occasions in which federal agencies allocated limited resources to
entities lacking adequate financial and technical capabilities resulted in
costly problems. For instance, when the FCC selected certain “designated
entities” for favored treatment in its PCS spectrum auction, valuable spectrum
allocated to NextWave went unused for years as NextWave’s bankruptcy battle
played out in the courts. More recently, the Rural Utility Service’s rural
broadband loan program has come under scrutiny for inadequate safeguards. A May 2014 report by the Government
Accountability Office, for example, ascertained that of 100 loans approved
since 2002, “43 loans are no longer active, either because they have been
rescinded or are in default.” The inactive loans constituted 54% of the
approximately $2 billion dollars awarded by RUS up to that time. Both episodes
serve as reminders of the need for safeguarding rural broadband experiment
subsidies.

And third,
any unwillingness by banks to provide financial security to rural electrical
co-op broadband experiments through LOCs suggests unnecessary risk and lack of feasibility
in such undertakings. If banks are unwilling to bear the financial risk of
failure by co-op broadband experiments, why should voice consumers be made to
take on that risk? When in doubt, safeguarding scarce funds for the benefit of
consumers takes priority over inconvenience to subsidy recipients.

In administering the
Rural Broadband Experiments program, the FCC must continue to ensure scarce
funds collected from consumers are used efficiently and protected from
unnecessary risk. The FCC should adhere to its stated “paramount objective” by
maintaining strong safeguards to protect those funds against misuse. It should refuse
to cut corners on its letters of credit rules.